ITEM 2
.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2019 (the “2018Form 10-K”).
Special Note Regarding Forward-Looking Statements
Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.
Any expectations based on these forward-looking statements are subject to risks and uncertainties, including the risks described in Part I, Item. These and many other factors could affect the Company’s future operating results A, “Risk Factors, “in the 2018 Form 10-Kand financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.
Special Note Regarding Smaller Reporting Company Status
We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.
Where to find more information about us.
We make available, free of charge, on our website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any Current Reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K, and any amendments to such reports, as soon as reasonably practicable following the electronic filing of such reports with the SEC. In addition, in accordance with SEC rules, we provide electronic or paper copies of our filings free of charge upon request.
Critical Accounting Policies
The preparation of our financial statements in conformity with US generally accepted accounting principles (“US GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our critical accounting policies include the following:
Marketable Securities
:
The Company periodically invests a portion of its cash in excess of short-term operating needs in marketable equity securities. These investments are classified as available-for-sale in accordance with US GAAP. The Company does not have any investments classified as held-to-maturity or trading securities. Available-for-sale investments are carried at their fair value using quoted prices in active markets for identical securities, and, effective January 1, 2018, unrealized gains and losses are reported as a component of net income in the statements of income. Prior to January 1, 2018, unrealized gains and losses were reported as other comprehensive income as a component of equity. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than one year are classified as long-term investments in the accompanying condensed consolidated balance sheets.
Alpha Pro Tech, Ltd.
I
nventories:
Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and quantities on hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Accounts Receivable:
Accounts receivable are recorded at the invoice amount and do not bear interest, the general terms for receivables is net 30 days. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about customers’ current ability to pay. Account balances are charged against the allowance when the potential for recovery is considered remote.
Leases
:
We determine if an arrangement is a lease at inception. Operating leases are included as right-of-use (“ROU”) assets and lease liabilities on our condensed consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate, and therefore we estimate our incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our condensed consolidated balance sheet with a term of one year or less. We elected a package of transition practical expedients which included not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.
Revenue Recognition:
Net sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring the promised products to the customer, with revenue being recognized at the point in time the customer obtains control of the products, which is generally when title passes to the customer upon delivery at which time a receivable is created for the invoice sent to the customer. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates and estimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. Our contracts have a single performance obligation. Sales taxes and value added taxes in domestic and foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon the nature of the private labelling. The Company has determined that it has no material contract assets, and has concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables.
See Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements (Unaudited), which appear elsewhere in this report, for information on revenue disaggregated by type and by geographic region.
Sales Returns, Rebates and Allowances:
Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user, product-specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.
Alpha Pro Tech, Ltd.
Stock-Based Compensation:
The Company accounts for stock-based awards using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation. ASC 718 requires companies to record compensation expense for the value of all outstanding and unvested share-based payments, including employee stock options and similar awards.
The fair values of stock option grants are determined using the Black-Scholes option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management’s expectations of future volatility, risk-free interest rates from published sources, expected term based on historical data and no dividend yield, as the Board of Directors currently has no plans to pay dividends in the foreseeable future. The Company accounts for option forfeitures as they occur. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, the option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value of such options.
OVERVIEW
Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel products for the cleanroom, and industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the "Alpha Pro Tech" brand name, as well as under private label.
Our products are grouped into two business segments: the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and the Disposable Protective Apparel segment, consisting of disposable protective clothing (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. All financial information presented in this report reflects the current segmentation.
Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel, including face masks and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in FDA approved facilities, regardless of the market served. Based on these similarities we determined that it would be best to consolidate the Infection Control segment into the Disposable Protective Apparel segment beginning with the first quarter of 2019.
Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing, medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.
Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.
Alpha Pro Tech, Ltd.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of net sales for the periods indicated:
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Gross profit
|
|
|
36.0
|
%
|
|
|
39.0
|
%
|
|
|
37.6
|
%
|
|
|
39.0
|
%
|
Selling, general and administrative expenses
|
|
|
28.6
|
%
|
|
|
28.6
|
%
|
|
|
29.2
|
%
|
|
|
31.2
|
%
|
Income from operations
|
|
|
6.2
|
%
|
|
|
9.1
|
%
|
|
|
7.2
|
%
|
|
|
6.5
|
%
|
Income before provision for income taxes
|
|
|
10.9
|
%
|
|
|
9.6
|
%
|
|
|
11.4
|
%
|
|
|
7.5
|
%
|
Net income
|
|
|
8.8
|
%
|
|
|
7.9
|
%
|
|
|
9.4
|
%
|
|
|
6.2
|
%
|
Three and
Six
months ended
June
30, 201
9,
compared to Three and
Six
months ended
June
30, 201
8
Sales.
Consolidated sales for the three months ended June 30, 2019 decreased to $11,415,000 from $12,109,000 for the three months ended June 30, 2018, representing a decrease of $694,000, or 5.7%. This decrease consisted of decreased sales in the Disposable Protective Apparel segment (now including face masks and face shields) of $832,000, partially offset by increased sales in the Building Supply segment of $138,000.
Building Supply segment sales for the three months ended June 30, 2019 increased by $138,000, or 2.1%, to $6,710,000, compared to $6,572,000 for the same period of 2018. This segment increase was primarily due to an increase in sales of the economy TECHNO SB® family brand of synthetic roof underlayment, partially offset by a decrease in sales of economy REX™ Wrap brand of housewrap and a decrease in other woven material. For the three months ended June 30, 2019, synthetic roof underlayment increased by 23.2%, partially offset by a decrease in housewrap of 8.6% and a decrease in other woven material of 14.2% compared to the same period of 2018. Early in the second quarter of 2019, we announced the expansion of our TECHNO family of spunbond based (SB) products, which we expect to significantly expand our market share in the synthetic roof underlayment market. We are pleased with the early success of our new TECHNO SB® 25 product, which was a driving force in our 23.2% growth in synthetic roof underlayment during the second quarter of 2019. A softening in U.S. housing starts affected our housewrap sales during the quarter, and our other woven material sales were down as a result of our largest customer in this category having excess inventory and a slowdown in orders from their customers and we do expect this to continue for the remainder of the year. The sales mix of the Building Supply segment for the three months ended June 30, 2019 was 47% for synthetic roof underlayment, 43% for housewrap and 10% for other woven material. This sales mix is compared to 39% for synthetic roof underlayment, 49% for housewrap and 12% for other woven material for the three months ended June 30, 2018.
Sales for the Disposable Protective Apparel segment for the three months ended June 30, 2019 decreased by $832,000, or 15.0%, to $4,705,000, compared to $5,537,000 for the same period of 2018. This segment decrease was primarily due to a decrease in sales of our disposable protective clothing, partially offset by an increase in sales of face masks and face shields. The decrease was primarily due to lower sales to our major international supply chain partner, partially as a result of an inventory rebalancing, as well as one of its customers, who made a large purchase of disposable protective clothing in the prior year, deciding to exit the market. In addition, the second quarter of 2019 was a challenging comparative quarter in that last year’s second quarter sales with this partner were a record high. On a year-to-date basis, however, sales to this partner have increased, currently trending on an annualized basis to be a record high and disposable protective clothing sales are up almost 6.0% for the six months ended June 30, 2019 compared to the same period last year. The sales mix of the Disposable Protective Apparel segment for the three months ended June 30, 2019 was 74% for disposable protective clothing, 17% for masks and 9% for shields. This sales mix is compared to 79% for disposable protective clothing, 14% for face masks and 7% for face shields for the three months ended June 30, 2018.
Consolidated sales for the six months ended June 30, 2019 increased to $23,718,000 from $23,551,000 for the six months ended June 30, 2018, representing an increase of $167,000, or 0.7%. This increase consisted of increased sales in the Disposable Protective Apparel Segment of $200,000, partially offset by decreased sales in the Building Supply segment of $33,000.
Alpha Pro Tech, Ltd.
Building Supply segment sales for the six months ended June 30, 2019 decreased by $33,000, or 0.2%, to $13,208,000, compared to $13,241,000 for the same period of 2018. Our synthetic roof underlayment product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of REX™ Wrap, REX™ Wrap Plus and REX™ Wrap Fortis. This slight Building Supply segment decrease was primarily due to a decrease in sales of housewrap of 5.2%, a decrease in sales of other woven material of 6.3% and an increase in rebates, partially offset by an increase in sales of synthetic roof underlayment of 8.1%, compared to the same period of 2018. Synthetic roof underlayment sales have increased as a result of increased sales of the TECHNO family products. Housewrap sales in the first half of 2019 have been negatively affected by softer U.S. housing starts due in part to unusually severe weather across many parts of the country. Other woven material sales are down, as mentioned above, due to lower orders from a customer that currently has excess inventory and has seen a decline in its business. The sales mix of the Building Supply segment for the six months ended June 30, 2019 was 46% for synthetic roof underlayment, 44% for housewrap and 10% for other woven material. This compared to 43% for synthetic roof underlayment, 46% for housewrap and 11% for other woven material for the six months ended June 30, 2018.
Sales for the Disposable Protective Apparel segment for the six months ended June 30, 2019 increased by $200,000, or 1.9%, to $10,510,000, compared to $10,310,000 for the same period of 2018. This segment increase was primarily due to a 5.7% increase in disposable protective clothing, partially offset by a decrease in sales of masks and to a lesser extent shields. The increase was primarily due to increased sales to our major international supply chain partner. Mask sales have been negatively affected by a less severe flu season in 2019. The sales mix of the Disposable Protective Apparel segment for the six months ended June 30, 2019 was 76% for disposable protective clothing, 16% for masks and 8% for shields. This sales mix is compared to 74% for disposable protective clothing, 18% for masks and 8% for shields for the six months ended June 30, 2018.
Gross Profit.
Gross profit decreased by $613,000, or 13.0%, to $4,106,000 for the three months ended June 30, 2019, from $4,719,000 for the same period of 2018. The gross profit margin was 36.0% for the three months ended June 30, 2019, compared to 39.0% for the same period of 2018. For the three months ended June 30, 2019, gross profit margin was affected by a change in product mix in the Building Supply segment, with significant growth in the economy line of synthetic roof underlayment, which has lower gross margin. In addition, both segments were negatively impacted by increased rebates.
Gross profit decreased by $265,000, or 2.9%, to $8,909,000 for the six months ended June 30, 2019, from $9,174,000 for the same period of 2018. The gross profit margin was 37.6% for the six months ended June 30, 2019, compared to 39.0% for the same period of 2018. Certain products that were duty free until June 4, 2019 under the U.S. Customs and Borders Protection Generalized System of Preferences (GSP) will no longer be duty free, as the government program was terminated. As a result of this and a change in product mix, management expects gross profit margin to be in the mid thirty percent range going forward.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased by $206,000, or 5.9%, to $3,262,000 for the three months ended June 30, 2019, from $3,468,000 for the three months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses remained flat at 28.6% for the three months ended June 30, 2019, compared to the same period of 2018. The decrease in selling, general and administrative expenses was primarily the result of lower employee compensation and lower commission on sales of Disposable Protective Apparel segment products, partially offset by increased foreign exchange expense.
The change in expenses by segment for the three months ended June 30, 2019 was as follows: Disposable Protective Apparel (which now includes expenses from the former Infection Control segment) was down $125,000, or 11.2%; Building Supply was up $21,000, or 1.6%; and corporate unallocated expenses were down $102,000, or 9.5%. The decrease in the Disposable Protective Apparel expenses was primarily due to decreased employee compensation and sales commission, and the decrease in corporate unallocated expenses was also primarily due to lower employee compensation. The increase in the Building Supply expenses was primarily a result of increased marketing expenses.
Selling, general and administrative expenses decreased by $412,000, or 5.6%, to $6,937,000 for the six months ended June 30, 2019, from $7,349,000 for the six months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses decreased to 29.2% for the six months ended June 30, 2019, from 31.2% for the same period of 2018. The decrease in selling, general and administrative expenses was primarily the result of the accrual of expenses associated with a mediated settlement of a litigation matter during the first quarter of 2018 that did not recur for the same period of 2019.
The change in expenses by segment for the six months ended June 30, 2019 was as follows: Disposable Protective Apparel was down $57,000 or 2.7%; Building Supply was up $145,000, or 5.6%; and corporate unallocated expenses were down $500,000, or 19.8%. The decrease in the Disposable Protective Apparel segment expenses was related to lower commissions and the increase in the Building Supply segment expenses was primarily due to increased trade show and sales-related travel expenses. The decrease in corporate unallocated expenses was primarily due to expenses for the mediated settlement mentioned above.
Alpha Pro Tech, Ltd.
In accordance with the terms of his employment agreement, the Company’s President and Chief Executive Officer is entitled to an annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. A bonus amount of $58,000 was accrued for the three months ended June 30, 2019, as compared to $61,000 for the same period of 2018. A bonus amount of $135,000 was accrued for the six months ended June 30, 2019, as compared to $93,000 for the same period of 2018.
Depreciation and Amortization.
Depreciation and amortization expense decreased by $4,000, or 2.8%, to $140,000 for the three months ended June 30, 2019, from $144,000 for the three months ended June 30, 2018. Depreciation and amortization expense decreased by $23,000, or 7.9%, to $267,000 for the six months ended June 30, 2019, from $290,000 for the same period of 2018. The decrease was primarily attributable to decreased depreciation for machinery and equipment in the Building Supply segment.
Income from Operations.
Income from operations decreased by $403,000, or 36.4%, to $704,000 for the three months ended June 30, 2019, compared to $1,107,000 for the three months ended June 30, 2018. The decreased income from operations was primarily due to a decrease in gross profit of $613,000, partially offset by a decrease in selling, general and administrative expenses of $206,000 and a decrease in depreciation and amortization expense of $4,000. Income from operations as a percentage of net sales for the three months ended June 30, 2019 was 6.2%, compared to 9.1% for the same period of 2018.
Income from operations increased by $170,000, or 11.1%, to $1,705,000 for the six months ended June 30, 2019, compared to $1,535,000 for the six months ended June 30, 2018. The increased income from operations was primarily due to a decrease in selling, general and administrative expenses of $412,000 and a decrease in depreciation and amortization expense of $23,000, partially offset by a decrease in gross profit of $265,000.
Other Income.
Other income increased by $489,000 to $544,000 for the three months ended June 30, 2019 from $55,000 for the same period of 2018. The increase was primarily due to an increase in gain on marketable securities of $536,000 and an increase in interest income of $20,000 due to restructuring the interest terms on our operating cash accounts, partially offset by a decrease in equity in income of unconsolidated affiliate of $67,000.
Other income consisted of equity in income of unconsolidated affiliate of $84,000, a gain on marketable securities of $439,000 and interest income of $21,000 for the three months ended June 30, 2019. Other income consisted of equity in income of unconsolidated affiliate of $151,000, a loss on marketable securities of $97,000 and interest income of $1,000 for the three months ended June 30, 2018.
Other income increased by $778,000 to $1,004,000 for the six months ended June 30, 2019, from $226,000 for the same period of 2018. The increase was primarily due to the gain on marketable securities in 2019 compared to a loss on marketable securities during the same period of 2018, for a net change of $674,000, an increase in equity in income of unconsolidated affiliate of $71,000 and an increase in interest income of $33,000.
Alpha Pro Tech, Ltd.
Other income consisted of equity in income of unconsolidated affiliate of $361,000, a gain on marketable securities of $609,000 and interest income of $34,000 for the six months ended June 30, 2019. Other income consisted primarily of equity in income of unconsolidated affiliate of $290,000, a loss on marketable securities of $65,000 and interest income of $1,000 for the six months ended June 30, 2018.
Income before Provision for Income Taxes.
Income before provision for income taxes for the three months ended June 30, 2019 was $1,248,000, compared to income before provision for income taxes of $1,162,000 for the three months ended June 30, 2018, representing an increase of $86,000, or 7.4%. This increase in income before provision for income taxes was primarily due to an increase in other income of $489,000, partially offset by a decrease in income from operations of $403,000.
Income before provision for income taxes for the six months ended June 30, 2019 was $2,709,000, compared to income before provision for income taxes of $1,761,000 for the six months ended June 30, 2018, representing an increase of $948,000, or 53.8%. This increase in income before provision for income taxes was due to an increase in income from operations of $170,000 and an increase in other income of $778,000.
Provision for Income Taxes
. The provision for income taxes for the three months ended June 30, 2019 was $238,000, compared to $203,000 for the same period of 2018. The effective tax rate was 19.1% for the three months ended June 30, 2019, compared to 17.5% for the same period of 2018. The Company does not record a tax provision on equity in income of unconsolidated affiliate.
The provision for income taxes for the six months ended June 30, 2019 was $481,000, compared to $294,000 for the same period of 2018. The effective tax rate was 17.8% for the six months ended June 30, 2019, compared to 16.7% for the same period of 2018. As mentioned above, the Company does not record a tax provision on equity in income of unconsolidated affiliate.
Net Income.
Net income for the three months ended June 30, 2019 was $1,010,000, compared to net income of $959,000 for the same period of 2018, representing an increase of $51,000, or 5.3%. The net income increase was due to an increase in income before provision for income taxes of $86,000, partially offset by an increase in provision for income taxes of $35,000. Net income as a percentage of net sales for the three months ended June 30, 2019 was 8.8%, compared to 7.9% for the same period of 2018. Basic and diluted earnings per common share for the three months ended June 30, 2019 and 2018 were $0.08 and $0.07, respectively.
Net income for the six months ended June 30, 2019 was $2,228,000, compared to net income of $1,467,000 for the same period of 2018, representing an increase of $761,000, or 51.9%. The net income increase was due to an increase in income before provision for income taxes of $948,000, partially offset by an increase in provision for income taxes of $187,000. Net income as a percentage of net sales for the six months ended June 30, 2019 was 9.4%, and net income as a percentage of net sales for the same period of 2018 was 6.2%. Basic and diluted earnings per common share for the six months ended June 30, 2019 and 2018 were $0.17 and $0.10, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2019, the Company had cash of $5,502,000 and working capital of $25,152,000, representing an increase in working capital of $612,000 from $24,540,000 as of December 31, 2018. As of June 30, 2019, the Company’s current ratio (current assets/current liabilities) was 13:1, compared to a 14:1 current ratio as of December 31, 2018. Cash decreased by 21.5%, or $1,505,000, to $5,502,000 as of June 30, 2019, compared to $7,007,000 as of December 31, 2018 but increased from $4,488,000 as of March 31, 2019. The decrease in cash from December 31, 2018 was due to cash provided by operating activities of $193,000, cash used in financing activities of $1,577,000 and cash used in investing activities of $121,000.
We have a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. As of June 30, 2019, the prime interest rate was 5.50%. This credit line will expire in May 2020. The available line of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit was $3,500,000 as of June 30, 2019. As of June 30, 2019, we did not have any borrowings under this credit facility and do not anticipate using it in the near future. The credit facility includes customary financial and non-financial debt covenants. As of June 30, 2019 we believe that we are in compliance with all such covenants.
Alpha Pro Tech, Ltd.
Net cash provided by operating activities of $193,000 for the six months ended June 30, 2019 was due to net income of $2,228,000, impacted primarily by the following: stock-based compensation expense of $260,000, depreciation and amortization expense of $267,000, gain on marketable securities of $609,000, equity in income of unconsolidated affiliate of $361,000, operating lease expense net of accretion of $366,000, an increase in accounts receivable of $704,000, a decrease in prepaid expenses of $589,000, an increase in inventory of $991,000, a decrease in accounts payable and accrued liabilities of $525,000 and a decrease in lease liabilities of $327,000.
Accounts receivable increased by $704,000, or 13.2%, to $6,022,000 as of June 30, 2019, from $5,318,000 as of December 31, 2018. The increase in accounts receivable was primarily related to increased sales in the latter half of the second quarter of 2019 compared to the same period fourth quarter of 2018. The number of days that sales remained outstanding as of June 30, 2019, calculated by using an average of accounts receivable outstanding and annual revenue, was 56 days, compared to 40 days as of December 31, 2018.
Inventory increased by $991,000, or 10.0%, to $10,869,000 as of June 30, 2019, from $9,878,000 as of December 31, 2018. The increase was primarily due to an increase in inventory for the Building Supply segment of $1,082,000, or 25.1%, to $5,384,000, partially offset by a decrease in inventory for the Disposable Protective Apparel segment of $91,000, or 1.6%, to $5,485,000,
Prepaid expenses decreased by $589,000, or 14.7%, to $3,410,000 as of June 30, 2019, from $3,999,000 as of December 31, 2018. The decrease was primarily due to a decrease in deposits for the purchase of inventory for the Building Supply segment.
Right-of-use assets as of June 30, 2019 decreased by $366,000 to $3,089,000 from $3,455,000 as of January 1, 2019 when ASC 842 was adopted.
Accounts payable and accrued liabilities as of June 30, 2019 decreased by $525,000, or 27.3%, to $1,395,000, from $1,920,000 as of December 31, 2018. The change was primarily due to a decrease in accrued liabilities as a result of payments of 2018 year-end commissions and bonuses.
Lease liabilities as of June 30, 2019 decreased by $327,000 to $3,128,000 from $3,455,000 as of January 1, 2019. This is the result of adopting ASC 842
, Leases
.
Net cash used in investing activities was $121,000 for the six months ended June 30, 2019, compared to net cash used in investing activities of $240,000 for the same period of 2018. Investing activities for the six months ended June 30, 2019 consisted of the purchase of property and equipment of $254,000 and proceeds from the sale of marketable securities of $133,000. Investing activities for the six months ended June 30, 2018 consisted of the purchase of property and equipment of $240,000.
Net cash used in financing activities was $1,577,000 for the six months ended June 30, 2019, compared to net cash used in financing activities of $1,497,000 for the same period of 2018. Net cash used in financing activities for the six months ended June 30, 2019 resulted from the payment of $1,636,000 for the repurchase of common stock, partially offset by proceeds of $59,000 from the exercise of stock options. Net cash used in financing activities for the six months ended June 30, 2018 resulted from the payment of $1,617,000 for the repurchase of common stock, partially offset by proceeds of $120,000 from the exercise of stock options.
As of June 30, 2019, we had $1,063,000 available for additional stock purchases under our stock repurchase program. For the six months ended June 30, 2019, we repurchased 427,000 shares of common stock at a cost of $1,636,000. As of June 30, 2019, we had repurchased a total of 17,630,907 shares of common stock at a cost of $33,405,000 through our repurchase program. We retire all stock upon repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.
We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.
Alpha Pro Tech, Ltd.
Recent
Accounting
Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, we adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet with the recognition of new right- of-use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than one year. Upon adoption, both assets and liabilities on our consolidated balance sheet increased by approximately $3,455,000. We have elected a package of transition practical expedients which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the ROU assets. See also Note 13 to the Condensed Consolidated Financial Statements (Unaudited), which appear elsewhere in this report.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for public entities for the annual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. Management is currently evaluating the requirements of this guidance and has not yet determined the impact on the adoption of the Company’s financial position or results from operations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoptions permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time.